Investing for college requires multiple years of planning. Many parents set up a college fund via a 529 plan or a UGMA fund to save up for their children’s education.
Although each of these investment vehicles guides parents towards the same goal, there are major differences between a UGMA fund and a 529 plan. Some parents will benefit more from a college fund 529 plan while other families will prefer a UGMA fund.
What is UGMA?
A UGMA fund allows you to gift assets to your children. When you give your child assets by way of a UGMA, a certain percentage of the gift will be tax-free. A parent acts as a custodian and manages the UGMA account until the child is no longer considered a minor.
Unlike a UGMA fund, a UTMA fund isn’t limited to cash and securities. Real estate, royalties, paintings, cars, and patents qualify as assets that you can categorize into a UTMA fund.
What is a 529 plan?
A 529 plan is a popular choice when it comes to investing in your children’s future college experience. This tax-advantaged savings account can help you pay for the education of your kids as early as kindergarten.
You can withdraw your funds tax-free as long as you put those funds towards qualifying purchases pertaining to education. If you’ve already decided on a specific college for your child, you can prepay the tuition in advance to lock in today’s rates.
According to FinAid, college tuition increases by 8% per year on average. While we can debate how much college tuition increases each year and what the future will look like, the costs of college tuition continue to increase.
Locking in a specific tuition rate now can reduce your stress about investing for college. However, your child would have to attend that college, and your 529 plan may outpace tuition increases.
Is 529 or UGMA better?
The 529 plan and UGMA fund both provide reliable paths to investing for college. If you want to invest in your child’s future, a 529 plan offers far more benefits. If you plan on allocating the funds for education or something else, a UGMA fund is a better choice.
Comparing UGMA vs 529 plan
Analyzing the similarities and the differences between these two plans will help you make the best decision for you and your family. Consider these factors when trying to make the decision between a college fund 529 plan vs a UGMA fund.
Investing for education
The 529 plan offers superior tax advantages, especially compared to a UGMA fund. Any gains within the 529 plan will grow tax-free, and you won’t incur taxes when making withdrawals for education-related expenses. UGMA funds do not provide the same tax benefits. Only a small portion of unearned income doesn’t get taxed.
Ownership of funds
When you invest in a 529 plan for your child, you retain ownership of your funds. That way, if you raise multiple children, you can allocate your second child as the beneficiary of the 529 plan once your first child graduates college.
You’ll also act as a custodian for the UGMA fund, but your child will gain full access to the fund when they mature, which can be anywhere from age 18 to 25. Your child can spend the UGMA funds in any way they desire. If you set up a UGMA fund, you must teach your child about personal finance.
Flexibility
Funds that are put in a 529 plan only receive tax perks when you invest in education. However, if you withdraw the funds for non-education expenses, you’ll have to deal with a 10% penalty tax in addition to federal and state taxes.
Your child may not attend college after all, or your child might end up earning a full scholarship, which would significantly lower their need for the funds within the 529 plan. But with a UGMA, the funds can be put towards any type of investment, like your child buying his or her first home.
If your child needs help with college payments, you can transfer your UGMA funds into a 529 plan. However, transferring 529 plan funds into a UGMA account would result in a significant tax burden.
What’s the difference between UGMA vs 529 accounts?
UGMA accounts and 529 plans are different in their own ways. Consider these nuances before deciding where you want to invest your funds.
| UGMA | 529 Plans | |
| Maturity Date | When the beneficiary reaches 18 years old with a maximum age of 25 | None |
| Contribution Limits | $15,000 per year for single taxpayers or $30,000 per year for married taxpayers | Ranges from $235,000 to $529,000 but you cannot contribute more than the expected cost of the beneficiary’s education |
| Financial Aid Impact | Less likely to receive financial assistance | Minimal impacts |
| Asset Transfer | No tax burden | Penalty tax |
| Gift Tax Limit | $15,000 per year for single taxpayers or $30,000 per year for married taxpayers | $15,000 per year for single taxpayers or $30,000 per year for married taxpayers |
| Termination Date | When the beneficiary reaches the age set forth by the state in which they reside | No termination date |
Alternative ways to save for your child’s future
A UGMA fund and a 529 plan both present a way for parents to save for their children’s future. Other parents lean towards alternative investing strategies to help their children financially.
Investing
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MoneyLion provides guidance, which can help investors create a portfolio that matches their risk tolerance. You can select from an array of risk tolerance levels, ranging from a steady income portfolio focused on bond ETFs to an aggressive portfolio with at least 80% of your portfolio comprising stocks.
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Roth IRA
A Roth IRA is a retirement fund that provides tax-free withdrawals upon retirement. Any growth that takes place within your Roth IRA is tax-free. Some investors use their Roth IRA to buy high-yielding dividend stocks because the dividend payments don’t get taxed either.
You can start withdrawing from your Roth IRA tax-free once you are 59.5 years old and your Roth IRA account is at least five years old. A Roth IRA makes the most sense for investors with long-term financial goals.
Savings bond
A savings bond is a low-risk investment that provides minimal returns. Savings bonds appeal to conservative investors who want their money to grow slightly rather than not grow at all. But keep in mind that some savings bonds won’t mature until thirty years into the future.
Savings account
A savings account isn’t the best choice when it comes to earning a return on your investment, but rather, it is intended to help you save cash in the event of an emergency. The financial safety net will also help you with education expenses.
MoneyLion’s Financial Safety Net allows you to access all of your available funds within a single app. You can also get access to $250 at 0% APR via Instacash. Get complete control over your banking through the MoneyLion Financial Safety Net today!
Coverdell ESA
A Coverdell ESA is a custodial account that is specifically designed for the purpose of funding education-related expenses. The maximum contribution per year per beneficiary is $2,000. While a Coverdell ESA can help you fund your children’s college education, you shouldn’t rely on a Coverdell ESA alone. Contributions to a Coverdell ESA fund are not tax-deductible.
Invest in your child’s education today
It’s best to start investing for your child’s college long before they decide which college they want to attend. UGMA accounts and 529 plans can seriously help you when it comes to investing in your children’s future college plans.
A MoneyLion investment account is a reliable resource for the purpose of preparing for college tuition. MoneyLion gives you access to automatic investing and portfolio strategies that are tailored to your preferred risk tolerance. Sign up for a MoneyLion investment account today!
Do I have to file taxes for UTMA accounts?
You do not have to file taxes for a UTMA account. The account will belong to your child, and the account will be reported under their Social Security Number.
Is a UTMA considered a gift?
A UTMA is considered a gift. Some gifts will qualify for the annual gift tax exclusion.
Who can open an UGMA account?
Any adult who lives in the U.S. can open a UGMA account.
